2025 Social Security COLA: What You Need to Know to Secure Your Retirement

Introduction:

• It seems like every week there’s a new world event that shakes the economy, and for many retirees, it's tough to know where they stand with it all—not just today but one, two, and even five years from now. One aspect of retirement that we can get clarity on is Social Security cost-of-living adjustments (COLA). In today’s video, we’re going to walk through the latest expert predictions to understand whether it’s better or worse than we think.

Main Discussion:

• Through my many years of helping retirees build comfortable retirement plans, one thing my company and I always look out for is that regardless of the cost-of-living adjustments, your retirement plan is sound. For a lot of people, though, that Social Security cost-of-living adjustment can be a huge reason for retirement success. In this video, we’re going to clarify whether you should be worried and provide some tips that you can use to mitigate the impact of lower-than-expected cost-of-living adjustments. So with that being said, let’s get into the video.

2025 COLA Prediction:

• The 2025 COLA adjustment is estimated to be 2.6% to 2.7%. We won’t know for sure until October 2024 because the calculation is based on the first nine months of the year, and it’s going to go into effect January 2025. It’s interesting to note that this is the first time in over 30 years with Social Security that we’ve had four consecutive years in a row where the cost-of-living adjustment has been at least 2.6% each year or more. The last time we saw this was the early 1990s.

Historical Context:

• The COLA plays a part in the majority of Americans’ retirement sustainability because it’s one of the only assets that can increase with inflation. However, it does have a mixed history. Prior to 1975, adjustments for COLA were very erratic and unpredictable. From 1940 to 1970, Congress approved only 11 COLA adjustments. In 1975, they decided to tie the COLA adjustment decision to something called CPI-W (Consumer Price Index for Urban Wage Earners), which was a welcomed improvement but might not have been the best fit. CPI-W measures the needs of working adults, whereas seniors’ spending focuses more on shelter and medical care, which have surged more than other categories.

Comparison of Recent Years:

• Over the past 15 years, COLA adjustments have been practically non-existent. In fact, 10 out of the last 15 years, the COLA has been 2% or lower. There were zero COLA adjustments in 2010, 2011, 2016, and 2017. Recent years have seen a dramatic change: 2022 had a 5.9% increase, 2023 had an 8.7% increase, and 2024 had a 3.2% increase. Each of these adjustments reflects a significant boost in benefits.

Impact of 2.6% Increase:

• What does a 2.6% increase mean for the average person? It means the average person will get about $50 more per month in their Social Security check, assuming Medicare Part B and D premiums don’t go up. For a married couple, that’s approximately $1,200 a year. But even with larger increases in recent years, it often isn’t enough. Many retirees are playing catch-up and feeling the effects of the higher cost of living.

Hypothetical Example:

• Let’s imagine a hypothetical scenario to illustrate the impact of lower COLA adjustments. Suppose Jim’s spending need is $50,000 a year, and his Social Security payment is also $50,000 a year. If the COLA adjustment increases by 2% each year and real inflation is 3.2% each year, then ten years into retirement, Jim’s Social Security would be $59,750 per year, but his real lifestyle need would be $66,318. By year 20, his Social Security would be $72,800 per year, but his real lifestyle need would be $99,975 less per month. This shows how COLA adjustments that don’t fully match inflation can lead to a reduced lifestyle over time.

Strategies for Retirees:

What can a retiree do to navigate COLA changes when they are lower than expected? First, ensure you have a sound income plan that includes reasonable cost-of-living adjustments and inflation assumptions. Make sure your income plan covers any gaps and that your other investments can properly cover those gaps. Being proactive with your income plan can help reduce the impact of lower COLA adjustments.

Additionally, consider reducing unnecessary expenses, working part-time, or waiting longer before claiming Social Security benefits. Part-time work can be enjoyable and contribute to your plan while offering a sense of contribution. Exploring gig economy opportunities can be a fun way to earn extra income.

Conclusion:

• Following this video, you’ll know exactly what you can do to mitigate changes to the lower-than-expected cost-of-living adjustment. There are many Social Security tax and income details that I haven’t covered in this short video. If you want a team of professionals to look at your specific situation and help you design a plan for a long and stress-free retirement, click the link in the description to book a no-cost visit with my team. I’ll see you in the next video.